Early-stage startups can implement ESG principles, here’s how
This year, sustainable business became a buzzword as more investors and stakeholders asked companies to be more aware of their businesses and implement ESG principles. A common assumption is that sustainability is only suitable for growth-stage companies and large corporations. Moreover, sustainability is often more closely associated with green actions, environmentally friendly products, and other things.
However, sustainability is more than just about the environment. Corporate sustainability has three pillars: economic, environmental, and social. Sustainability and the ESG variables that underlie it can also be applied to early-stage startups from these aspects.
As it is called “early,” entrepreneurs in this phase take the most time to figure out how to develop the right products or services for the market, build a customer base, and establish strong revenue or traction. As a venture capital firm with extensive exposure to digital startups in the early-stage phase, we understand startup founders‘ various challenges. Although it is not compulsory for startups to achieve sustainable business at this stage, we have seen a flourishing number of early-stage startup founders who are mindful of ESG and embedding ESG principles into their startups’ DNA, to set the foundation for building sustainable and impactful companies of the future. As a venture capital firm, we can help with ESG capacity building, realize the policy and apply it to the firm.
In the seed stage, startups can apply ESG principles by implementing good corporate governance and business integrity. For instance, treating the workforce with a fair wage, not hiring child laborers, bringing equal opportunities for all genders, employees, and board members, enhancing transparency for vendors and other stakeholders, and many other things.
Implementing ESG practices in the initial phase will benefit startups in the long run. For instance, building the companies’ brand image and reputation can gain customers’ trust and attract higher caliber employees. From the risk management side, startups aware of ESG risks will be better positioned to mitigate such risks and have vastly higher performance and survival. Most importantly, adopting ESG and impact considerations that fit with the company’s vision and mission can help with strategic direction and funding possibilities, which is an important aspect for many startups.
There are several ways to integrate ESG principles into your business, especially when you have just established your company.
1. Identify ESG risk factors that are relevant and material to your business
Early-stage startup founders can identify and be aware of the ESG risk factors related to their businesses and the industry in which they operate. We believe good corporate governance and business integrity practices are essential to be embedded by founders and management teams early. For example, complying with applicable laws and regulations, good standards of transparency and disclosures, whistle-blower mechanisms, and protection of cybersecurity and data. We advise founders to build ESG capacity as the startup grows, as an iteration of product-market fit and business model may change a startup’s exposure to ESG risks and opportunities.
On the environmental and social factors, founders and management need to ensure occupational health and safety standards, both in the materials and the operations, compliance to labor standards, such as no use of child laborers, treating laborers with fair wages, and others.
2. Assess your potential impacts
Besides identifying the ESG risk factors, the company can assess and identify the potential positive impacts its products and services may deliver. Aligning to a framework or metrics, such as the United Nations’ Sustainable Development Goals (SDGs), will ease the companies in developing the impact story, measuring and reporting when they need it.
For instance, our portfolio, TreeDots, the marketplace that provides the surplus and imperfect food supply from suppliers to customers, aims to tackle food loss and waste issues during distribution. Their impacts are aligned with UN SDG Number 2 (Zero Hunger) and 12 (Responsible Consumption and Production).
Another example is our biotech startup portfolios in addressing Indonesia’s healthcare problems. First, Nusantics, specializes in the microbiome and microbial testing. Another portfolio is Nalagenetics, specializing in prescription efficacy and drug response through DNA testing. Both portfolios have the same goal in aligning the UN SDG Number 3: Good Health and Well-Being.
3. Communicate and engage with stakeholders
Communicating and engaging with stakeholders, including investors, board members, workers, vendors, and customers, can signal that startups are serious about implementing ESG frameworks. For instance, East Ventures encourages our portfolios to communicate with us, helping them create values and figure out the best way to achieve sustainability.
East Ventures, the first venture capital in Indonesia to join the Principles for Responsible Investment (PRI) signatory, which is supported by the United Nations, believes that we need to lead the way for investors and asset managers in Indonesia to implement ESG principles. Creating positive impacts has already been in our DNA in the past decade. Therefore, we would like to continue and encourage the sustainability principles from end-to-end, both in the investment process, in our investment selection and in existing portfolios (see East Ventures’ sustainability Report for more details).
In the investment process, sustainable principles are applied, ranging the screening, due diligence, company review, and investment decision. For our existing portfolios, we continue to monitor and assist them in executing ESG principles, bringing the value creation, portfolio monitoring, and exit stage as well. These principles also apply more methodically to our team as we implement capacity building for the investment team. Therefore, the investment team has a deep understanding not only to be able to analyze market opportunities, commercial, and financial performance but also to ensure ESG policies are applied in the portfolios.